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Smith & Williamson's Andrews shocked by 'awful' Japan GDP numbers

Jane Andrews, manager of the Smith & Williamson Far Eastern Growth Trust, believes calling the direction of the yen is too difficult and has questioned just how committed the Bank of Japan is to reducing the value of its currency.

Andrews told Citywire : ‘With slowing external demand, I don’t think Western demand is going to pick up in any meaningful way and with the issues with China, it does weigh on the exporters in Japan’.

Despite being perennially underweight Japan in the portfolio, Andrews maintains that if you avoid those exporters most under pressure you can find the right companies and she has a 35% allocation to the country.

She is particularly focused on small and medium-sized companies operating in niche areas that stand to benefit from the increased domestic demand and throughout the Asian region.

Growth in credit

One example is credit card company AEON credit, a company which offers store credit cards throughout Asia including China, and which she believes is offering a unique service benefiting from a demand for increased credit in a traditionally frugal region.

Andrews believes that there has been a material impact as a result of the tensions between Japan and China that have come to the fore in recent months, on both economies.

‘It has obviously impacted businesses. The export numbers out of Japan show that there has been significant weakness to China. But then again China has been affected with exports from China to Japan also down.’

Andrews feels that there is further risk to the Chinese economy and that Japanese capital expenditure programs in China will find new homes throughout the ASEAN region, something she believes is already occurring.

That is not to say she is bearish on China, indeed she believes that Chinese growth rates have shown signs of bottoming and has recently increased her direct Chinese mainland holdings. ‘I think that China looks like it is picking up. We have seen electricity consumption start to tick up in the past few weeks and also retail sales have been reasonably healthy so we have seen signs that the Chinese economy may have bottomed out.’

China's economy bottoming?

In addition she feels the issues with the change of leadership in China have run their course and does not believe that Chinese policy will change with significant stimulus programs unlikely.

A strong source of outperformance in the portfolio over the last year has come from real estate investment trusts with a large holding in Singapore -based Parkway Life having performed strongly. However, she is not unduly concerned that the strong performance by the sector will come to an end any time soon.

‘Even though they have done well they are still offering an above average yield and investors are still wanting income’.

She is also sanguine about concerns over a bubble forming in income stocks.

‘I think we are a way off from that and within Asia you are seeing companies increasing their pay-out ratio and the underlying earnings are growing so they are able to pay out more. People underestimate the income you do get from Asia and over the past few years nearly half of all returns have come from dividends.’

In the portfolio Andrews is most positive on the fortunes of Thailand, The Philippines and Indonesia as all three are benefiting from strong domestic growth in their markets.

She believes there are signs of the first genuine credit cycles in some of these economies since the Asian crisis of 1997, which is also being supported by massive infrastructure spending.

This she says is at the expense of northern Asian economies such as Korea, Taiwan and Japan which she believes will continue to be subdued.

In the five years to the end of October Andrews' fund has returned 15.3% to investors compared to an 8.3% gain in the pan-Asia index.

Citywire Selection Verdict:

Jane Andrews maintains a healthy position in Japan in this pan -sia fund, and focuses on companies that can benefit from the prosperity and rapid growth in the region. Recently the portfolio’s risk averse stance has been changed, while at the same time selecting businesses that are to some degree insulated from European and Western struggles. It is consistently among the top investments in Asia Pacific and Japan.